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 Rev. Rul. 70-43

1970-1 C.B. 176

Sec. 1311

IRS Headnote

The provisions of section 1311 of the Code permit a taxpayer to correct the effect of a claimed capital loss subsequently determined to be an ordinary loss which gave rise to a net operating loss, provided the requirements of section 1313 have been met.

Full Text

Rev. Rul. 70-43

A taxpayer erroneously claimed on his Federal income tax returns a capital loss and capital loss carryovers when he should have claimed an ordinary loss and net operating loss carryback. He incurred a loss from the sale of business assets in the amount of $3,900 in 1965 and claimed a capital loss deduction of $1,000 for the calendar year 1965, and capital loss carryover deductions of $1,000 for 1966 and 1967, and $900 for 1968. In July 1969, during an examination of taxpayer's Federal income tax return for the year 1967, it was determined that the taxpayer had incurred an ordinary loss rather than a capital loss arising from the sale of the business assets in 1965. The deductions claimed for capital loss carryovers for the open taxable years 1966, 1967, and 1968 were disallowed.

The application of the taxpayer's 1965 loss as an ordinary loss rather than a capital loss resulted in a net operating loss for 1965 (a taxable year no longer open under the statutory period of limitations) which should have been carried back to 1962.

Held, the taxpayer is entitled, under the provisions of section 1311 of the Internal Revenue Code of 1954, provided a "determination" has been made within the meaning of section 1313 of the Code, to correct the effect of his error by taking the ordinary loss deduction for the year in which the error was made, even though the period of limitations on credit or refund expired for that year before the erroneous treatment was discovered. See Rev. Rul. 68-152, C.B. 1968-1, 369.

Held further, the taxpayer is entitled to carry back to earlier years and forward to later years (to the extent allowable by section 172 of the Code) the net operating loss resulting from the ordinary loss deduction.